The riba-free banking and finance system described in the four books given above is complete in its theoretical formulation and is ready for implementation. However, when a given bank decides to change over from conventional to the proposed system, it will have to estimate some parameters (coefficients in the model) that are specific to its own situation, and institute procedures to continuously monitor them. The data necessary for this exercise are already available in its past records. The projects proposed in the following paragraphs are designed to extract this data from its records and estimate the parameters needed for the changeover, and to monitor them from then on.
Since the parameters are dependent on the specific social, economic, business, banking and legal climate within which each bank has to operate, there is room for study of the same projects in every country and within each bank. However, a standard set of definitions and procedures will help compare the parameter values and hence bank performances across the banks. Therefore these projects can be undertaken by academics / professionals sponsored / supported by interested banks, central banks of Muslim countries, or banking institutions to set the standards and guidelines in the first instance. The projects are also suitable as MSc/MPhil dissertations. If some students and/or academic/professional institutions are willing to undertake these projects, supported by data from operational banks, the author is prepared to assist them. The model primarily relates to retail banking, and the necessary data are available at the branch level (or at the head office if we are dealing with a single-office bank).
Interested students/researchers/professionals/banks/organisations please contact the author.
E-mail: abdul99@europe.com
WebPage: http://users.bart.nl/~abdul/
Phone+Fax: +31-50-5775136
Project
Description
Cost of
overheads is the most important component in the whole model. This is the product of the loan capital
and a fixed coefficient, which is a cents-per-dollar cost of obtaining loanable
funds. It has been shown that in
all circumstances this overheads cost would be a part of the cost of
borrowing. Therefore it is
necessary to estimate this coefficient.
This
coefficient is obtained by dividing the net expenditure of the bank by the
total loans granted by the bank, on an annual basis. As such it varies from bank to bank and
from year to year. Net expenditure is obtained by
subtracting the total (services) income of the bank from its total
expenditure. Because they vary
from bank to bank and from year to year, it is necessary to set up a procedure
to routinely collect the necessary data and to compute its value.
This
project will define the components that go into the computation of the
coefficient, devise a scheme to collect the necessary data on a routine basis,
and will develop a procedure to compute the coefficient using this data.
While
each bank will have its own numerical value for the coefficient, it will be
very useful for comparative purposes to have the same definitions and
procedures. This will also be cost
effective and time efficient.
This is
the second most important component of the cost of borrowing. It is a one-time cost, specific to each
loan, because different loans may require different type of services (or
different combinations and sizes).
The services may include legal services, stamp duty, title checking and
evaluation of collateral, post and telecommunication, etc. Each of these services is specific to a
given loan, and each must be paid for.
Therefore all the services that may be necessary in the process of
granting a loan should be identified and a cost put on each. Some may depend on the size of the loan
and others not. These too may vary
from bank to bank and from year to year.
Therefore procedures have to be established that will routinely collect
the necessary data and compute the various costs and coefficients.
This
project will identify all the services that may be used, device a scheme to
collect the necessary data on a routine basis, and will develop a procedure to
compute the various costs and coefficients using this data.
The risk
insurance scheme suggested in the system is a completely new idea. It recognizes the fact that there is a
risk associated with every loan, and it also recognizes that it varies from
client to client. But the main
point is that even though the risk should be anticipated and precautions taken
in general, if at the end it is proved that there was no risk with a particular
client then he should be rewarded for his good conduct. This is achieved by refunding part of
his paid premium. The deduction
depends on the extent of the defaults during the period of his loan and his
share in the administrative costs of the scheme.
A major
study has to be undertaken, with both bankers and insurers taking part, to
devise a scheme. The bank should
be fully protected from any loss due to defaults, and the pool of premium
payments from all the clients of the bank (or banks, in a collective scheme)
should be sufficient to cover all possible defaults. The costs of running the scheme should be financed entirely
by the premium collection. The
scheme envisages a risk rating system for each client depending on his track
record.
This
project aims at devising a suitable loan default risk insurance scheme,
possibly run by a third party.
The
credit multiplier (CM) comes into play when commercial banks involve themselves
in participatory financing as well as when compensation for inflation is
introduced into commercial banking.
(CM comes into play also when the general model is to be used in an
interest-based environment.) In
its basic form CM is simply the inverse of the cash reserve ratio. Therefore essentially determined by the
central bank. However, in practice
it is much smaller than this and depends on several factors, including market
circumstances, size of the bank, and the policies of the particular bank. As such it varies from bank to bank and
from time to time. Since it plays
a crucial role in the bank’s liquidity and solvency, it is very important to
monitor its movements in order to take appropriate action when necessary. Therefore a scheme for routinely
collecting the required data and computing the multiplier is necessary.
The
project will define the components that go into the computation of the credit
multiplier, devise a scheme to collect the necessary data on a routine basis,
and will develop a procedure to compute the multiplier using this data.
A scheme
to determine the daily market price of gold (at the national level) becomes
necessary if compensation for the value loss of capital due to inflation is to
be introduced. The weekly averages
and, from them, the recommended 13-week moving averages are to be worked out
using these daily prices.
This
project will begin by identifying the type of gold that will be the standard,
the markets from where the price information is to be collected, and a method
of computing the average daily price.
The project will have to work out all the necessary procedures to bring
about a routine system to collect, collate and compute the daily, weekly, and
13-week moving average prices, and to disseminate this information to the
public and the banks through the central bank.
This is a
basic study, not particularly connected to any specific situation. But an understanding of the basic
characteristics of a bank’s deposits and loans will greatly facilitate policy
decisions. When the model is to
operate in an interest-based environment, though, this data will be of crucial
importance to compute the weighted average deposit interest rate in order to
get at the interest component in the cost of borrowing.
This is
also a basic study. A study of
these distributions, in an interest-based environment, is useful to show that,
contrary to popular conception, many of the savings account holders do not, in
reality, receive the expected interest payments for various reasons. For example, when minimum period
conditions are not met. (Interest
on ordinary savings account is paid only on the minimum amount kept for a
certain minimum period, which can be as long as three months in less developed
countries. In some countries there
are also restrictions on opening current accounts.) Their savings accounts are, in effect, current accounts
without the benefit of many of the current account facilities. This is especially the case with a
large in number of savings accounts holding small balances for short periods. It is good to show this by statistical
evidence so that people may be convinced that abolishing interest payments to
this category of savings accounts holders does not in reality change the status
quo. Since much of the funds for
short-term riba-free advances are to come from this source (besides the
current account balances), it is necessary to confirm this assumption.